Saturday, October 4, 2008

Bank Freeze Leaves Hundreds of Colleges Cut Off From Short-Term Funds

Wachovia bank has frozen the accounts of nearly 1,000 colleges, leaving institutions unable to access billions of dollars they depend on for salaries, campus construction, and debt payments.

The freeze, which affects most institutions that invest their endowment income and other assets through Commonfund, has some colleges worried that they won’t be able to make payroll this period, said Verne O. Sedlacek, president and chief executive of Commonfund, which manages investments for nonprofit institutions. Many colleges use the organization's short-term investment fund for operating expenses, “almost as a checking account,” he said.

As of last Friday, the Common Fund for Short Term Investments managed approximately $9.3-billion in assets for 900 colleges and roughly 100 private schools.

Wachovia, which agreed to sell its banking operations to Citigroup this week, announced on Monday that it was resigning as trustee of the fund and would allow plan participants to withdraw only 10 percent of their assets—the value of the securities that had reached maturity. That percentage grew to 26 percent on Tuesday as additional securities reached maturity, and is expected to reach 57 percent by the end of this year and 74 percent by the end of 2009.

But unless the credit markets thaw, enabling a new trustee to sell more of the short-term securities in the fund, colleges won’t be able to access all their money until at least 2010.

Conveying Bad News

Yesterday, representatives of Commonfund held a two-hour conference call with rattled college investors. John S. Griswold, Jr., executive director of the Commonfund Institute, Commonfund's research arm, said the organization empathized with the colleges but had no control over Wachovia's decision.

“Obviously, it couldn’t come at a worse time, at the end of the month and the end of the quarter,” he said in an interview. “So we can understand why people are upset.”

The freeze could have the biggest effect on smaller institutions like Bethany College, in Kansas, which has $700,000 invested in the fund. President Edward F. Leonard III said his institution has enough money to cover costs for now because students just paid tuition, but he’s worried about the second semester, when the college typically dips into its short-term funds to pay for a variety of operating expenses.

“All colleges ride a cash roller coaster,” he said. “But the smaller colleges, like Bethany, we feel those bumps more than others do.”

On Tuesday, Mr. Leonard wrote to his congressman, Rep. Jerry Moran, a Republican, to urge him to support federal legislation intended to rescue the financial sector. Mr. Moran voted against the $700-billion bailout bill, which had been backed by the Bush administration, on Monday.

“I just e-mailed his legislative assistant saying, ‘Hey, its starting to hit home,’” he said. “If you think this is something confined to New York City and Washington, D.C., its already hit one of your campuses in Kansas.”

Concerns About Making Payroll

Minnesota’s private colleges are worried as well. On Monday, the state’s independent-college association sent a letter to its Congressional delegation, warning that some colleges would be unable to make their payroll obligations this week.

“The failure of the House to adopt the recovery plan this afternoon has immediate implications for private colleges in Minnesota,” the letter reads. “As a result of the frozen capital markets and the failure of Congress to adopt a reasonable recovery plan, many of the members of our association are at the edge of their abilities to adapt. Any further delay by Congress or the administration will have immediate devastating effects on these institutions and the families they serve.”

Colleges with larger endowments, like the University of Vermont, may find it easier to adapt. Daniel M. Fogel, the university's president, said his institution has “tens of millions of dollars” invested in the short-term funds, but he expects that it will be able to make do.

“We may need to rely on some other liquidity sources, but if so, very briefly, because then we’ll be collecting the spring tuition,” he said.

Russell K. Osgood, the president of Grinnell College, in Iowa, said his institution has a “modest amount” invested in the fund and did “not foresee any impact.” But he said he feared for some of his colleagues.

“I’m scared thinking about others who are more dependent on it,” he said.